The words 'second source of income' sound like music to our tired ears. The spouse's earnings is the back up for the happily married. But sole earners need to create a second source of income to ensure there are no financial hiccups.
There are multiple ways of earning a second income Firstly, you could earn additional income by moonlighting. "Your talent is your best bet for a second income,'' says chartered accountant and financial trainer, P V Subramanyam of Subramoney.
You could use your talents to teach, train, consult or write a book or blog (get paid for advertisements), besides your regular job. But moonlighting is difficult if you are already working long hours and the income may not be regular.
A second option is that of starting or investing in a small business. For instance, a skin doctor opened a beauty parlour, a television serial writer started an editing studio while an enterprising professor chose to invest in coaching classes started by a friend while he continued with his full-time job.
But such enterprises are high-risk, high-returns game. Do due diligence before investing any monies and invest only a part of your savings to limit the losses.
A safer bet is third option of investing in a basket of securities that give regular returns while also safeguarding capital by creating a 'second income' fund.
Creating the right portfolio is critical. Harsh Roongta, CEO, Apnapaisa.com says, "Your portfolio needs to be balanced keeping in mind your risk profile and your financial goals.''
Fixed deposits and post office instruments remain the preferred investment choices for the cautious investor. Property is also a popular choice due to monthly rental income and capital appreciation. "But if there is a long gap during change of tenancy, then you have no second income,'' points out Subramanyam.
"Those looking for a regular income should invest in debt instruments. This is better as compared to property where the (rental) yield is very low 2-3% as compared with 8-9% in debt,'' says Arnav Pandya, CFP and financial advisor. Besides, given the high property prices, there is little room for capital appreciation.
"Debt funds like MIPs (monthly income plans) and accrual funds are safer options for a regular income,'' says Sanjay Khatri of Krushna Finance. Just make sure, you withdraw after three years to avoid capital gains tax on debt funds.
By far, the highest returns have been seen in equities. "The average returns on equities, over a 10 year period, is in the region of about 17%,'' says Roongta. If investing directly in equities, one should target companies with a high dividend yield.
The other option is to invest in an equity fund and withdrawal through SWPs (systematic withdrawal plans). Make sure you withdraw after a year to avoid capital gains tax and better still, wait at least five to 10 years, for good returns.
Bonds and gold should also be included to balance the second income portfolio.
The second income portfolio will be similar to the nest egg being created for life after retirement, except that the returns start pouring in earlier. "As the portfolio of the individual grows, the regular second income would grow too, and hence an individual should focus on this aspect,'' advises Pandya.
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